Introduction

The Supreme Court of India, in the case of ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) vs. M/S NESTLE SA (2023 INSC 928), delved into the intricate interpretation of the Most Favoured Nation (MFN) clause within India's Double Tax Avoidance Agreements (DTAAs) with OECD member countries such as the Netherlands, France, and Switzerland. The core issues revolved around whether the MFN clause could be invoked without a subsequent notification under Section 90 of the Income Tax Act, especially when third countries entered the Organisation for Economic Co-operation and Development (OECD) post the initial treaty agreements.

Summary of the Judgment

The Supreme Court addressed appeals arising from decisions of the Delhi High Court concerning the interpretation of the MFN clause in India's DTAAs. Specifically, the court examined whether:

• Right to Invoke MFN: Whether assessees could invoke the MFN clause when India had entered DTAAs with non-OECD members, who later became OECD members.
• Necessity of Notification: Whether the MFN benefits automatically apply or require a formal notification under Section 90 of the Income Tax Act.

The Supreme Court held that:

• A notification under Section 90(1) is mandatory for courts, authorities, or tribunals to give effect to any provisions of a DTAA or its protocols that alter existing law.
• The mere entry of a third-party country into the OECD does not automatically trigger the extension of MFN benefits to existing DTAAs. Such benefits must be explicitly notified.
• The interpretation of the term "is" within the MFN clause signifies the present state of affairs at the time the benefit is invoked, not retrospectively.

Consequently, the Supreme Court set aside the impugned orders of the Delhi High Court, allowing the revenue's appeals and reinforcing the necessity of formal notifications for MFN benefits to be applicable.

Analysis

Precedents Cited

The judgment extensively cited several landmark cases to underpin its stance:

• Steria India Ltd. vs. Commissioner of Income-Tax (2016): Addressed whether protocols form an integral part of DTAAs and the necessity of notifications for their applicability.
• Apollo Tyres Ltd. vs. Commissioner of Income Tax (2018): Further reinforced the interpretation that protocols require formal notifications to be effectual.
• Gramaphone Co. of India Ltd vs. Birendra Bahadur Pandey (1984) & Union of India vs. Azadi Bachao Andolan (2004): Emphasized that international treaties do not automatically become enforceable domestic law without enabling legislation.
• Maganbhai Ishwarbhai Patel vs. Union of India (1970): Highlighted the distinction between treaty formation and its domestic implementation, stressing the need for legislative action for enforceability.

Legal Reasoning

The court's reasoning hinged on the constitutional framework of India, particularly Article 253, which delegates treaty-making powers exclusively to the Parliament. Unlike monist countries where treaties automatically become part of domestic law, India follows a dualist approach where treaties require explicit legislative action to be enforceable.

The Supreme Court analyzed the MFN clauses in the context of treaties with the Netherlands, France, and Switzerland, noting that:

• Each treaty or protocol amendment required a separate notification under Section 90 to integrate its provisions into domestic law.
• The term "is" in the MFN clause was interpreted as referencing the current state at the time of invoking the benefit, not at the time of treaty signing.
• Executive decrees or unilateral actions by third-party countries do not bind Indian Revenue Authorities unless formally notified.

Consequently, without a formal notification, the MFN benefits cannot be automatically extended based on a third country's later entry into the OECD.

Impact

This judgment has significant implications for future tax treaty interpretations and negotiations in India:

• Strict Compliance: Reinforces the necessity for explicit notifications under Section 90 for any treaty modifications or benefits to take effect domestically.
• Clarity in MFN Clauses: Taxpayers and companies must ensure that all requisite notifications are in place to avail themselves of MFN benefits.
• Legislative Oversight: Highlights the paramount role of the Parliament in treaty enforcement, ensuring that international agreements align with domestic law.
• Precedent for Similar Cases: Provides a clear guideline for the interpretation of similar clauses in other DTAAs, ensuring consistency in judicial decisions.

Moreover, it underscores the dualist nature of India's legal system, differentiating it from monist jurisdictions and thereby shaping the approach to international treaties in Indian law.

Complex Concepts Simplified

Most Favoured Nation (MFN) Clause

The MFN clause in a DTAA ensures that if one country provides favorable tax treatment to another country, the same treatment should be extended to all countries with which it has a DTAA. This prevents discriminatory tax practices among treaty partners.

Double Tax Avoidance Agreement (DTAA)

DTAAs are treaties between two countries that aim to prevent individuals and companies from being taxed twice on the same income. They allocate taxing rights between the two jurisdictions to avoid double taxation.

Section 90 of the Income Tax Act

This section empowers the Central Government to enter into agreements with foreign countries to avoid double taxation and requires formal notifications for these treaties to take effect in India. Without such notifications, treaty provisions cannot be applied domestically.

OECD Membership

The Organisation for Economic Co-operation and Development (OECD) is an international organization of countries committed to promoting policies that improve economic and social well-being. Membership in the OECD often influences the terms and benefits in international treaties, including DTAAs.

Definitive Notification

A formal declaration made by the government, published in the official gazette, which implements the provisions of a treaty or protocol into domestic law, making it enforceable within the country.

Conclusion

The Supreme Court of India's decision in ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) vs. M/S NESTLE SA serves as a pivotal reaffirmation of the dualist approach in India's legal framework concerning international treaties. The judgment underscores the indispensable requirement of formal notifications under Section 90 of the Income Tax Act for DTAAs and their protocols to be effective domestically. By elucidating the interpretation of the MFN clause and the significance of the present state during its invocation, the court has set a clear precedent that safeguards against the automatic extension of tax benefits based on third-party countries' evolutions, such as OECD membership. This decision ensures that India maintains legislative oversight and consistency in the application of international tax treaties, thereby fortifying the integrity and reliability of its domestic and international tax systems.